This article originally published in The Northern Daily Leader on 19 January 2013.
Here’s a reasonably interesting fact – did you know that the first iPhone was only released just over five years ago? Back in 2007 the smartphone didn’t even exist, and now there are over one and a half billion of them in use. Changes in technology have both created and destroyed entire industries in just a few years. Even the humble garage sale is being threatened by advances in technology. Why go through the effort of collecting all your things and spreading them over your lawn and praying it doesn’t rain, when you can simply take a photo of each item and put it up for sale on eBay?
Always keen to try out a new fad, some years ago I decided to sell a few books on eBay. It wasn’t that I particularly wanted to get rid of the books, I was mainly curious as to how it worked. So I signed up, took some photos of the books I had decided to sell and set up an auction for each book. I set the reserve price at the cost of posting the item to the winning bidder, which I estimated would be $5.00 per book. After a week or so all the books had been sold through the auction process, with prices varying from $6.50 to $9.00; at first glance a successful outcome. That was until I took the books to the post office to send to the winning bidders. You can imagine my chagrin when the post office clerk told me it was going to cost $10.00 to send each book. All up I paid $40.00 to send the books to the winners, who sent me around $25.00 in return as payment. Needless to say, that was the last time I sold anything on eBay.
What turned the deal sour of course, were the transaction costs – the books sold for a reasonable price, but once transactions costs were taken into account I ended up losing money. Likewise, when it comes to investing in any asset, transaction costs are just as important. Every time you buy or sell a share for example, you incur a direct cost through brokerage. The more you trade, the greater the transaction costs. Research has also shown that frequent trading usually leads to lower returns and one of the primary reasons is the cost of each transaction. Think about what it costs every time you buy or sell a house – shares are the same, just on a smaller scale. The message is to always be aware of the transaction costs (and be careful on eBay) – both can be hazardous to your bank account.